As part of risk management, the Council has undertaken a series of scenario testing and sensitivity tests on the Business Plan. This has been carried out at two levels.
Firstly, sensitivity tests were carried out in the traditional way, based on single assumption changes, and the effects of those changes. For example, if inflation increases by an additional 1%, what effect does this have on the plan?
In fact, this sort of sensitivity analysis, though useful for testing purposes, does not occur in the real world. Therefore a second set of reality-based sensitivities was introduced. For this analysis, assumptions were made as to what would happen if, for instance, there was a local economic boom.
In this case, the original assumptions changed to reflect higher right to buy numbers, higher staff costs, higher labour costs, etc. Other scenarios concentrated on other combinations of effects.
Scenario 1
Worsening economic climate leading to inflation increasing by 1%, reduction in Right to Buy income, increased demand on properties, no real change to operating costs.
The major impact here comes from the reduction in Right to Buy sales, reduced to 80% of the original model. Void loss has also been reduced by 0.5% in general needs and 1% in sheltered. This coupled with the increase in inflation gives the following results:
| Indicator |
Current Position |
| Stock NPV per unit |
+£412 |
| Social Housing Occupancy cost per annum |
+£159 |
| Year end balances above minimum throughout plan |
Confirmed |
| Capital expenditure fundable |
Confirmed |
The overall assessment demonstrates that although there are some marginal changes the plan can cope with a significant reduction in Right to Buy income. In fact further testing confirmed that reducing the Right to Buy sales alone, would not lead to significant problems.
Scenario 2
Improving economic conditions, inflation maintained at 2.5%, increase in Right to Buy sales, reduced demand for properties, real increase in operating costs, real increase in maintenance costs.
For this scenario, Right to Buy expectations were increased by 20% and voids varied by 1%. All maintenance costs increased by 1% real.
| Indicator |
Current Position |
| Stock NPV per unit |
-£1,678 |
| Social Housing Occupancy cost per annum |
+£201 |
| Year end balances above minimum throughout plan |
Confirmed |
| Capital expenditure fundable |
Failed in early years |
Naturally, the increasing management and maintenance costs have a detrimental effect on both main indicators. Additionally, the capital expenditure is not fundable in its present format. However, it does not require radical restructuring to achieve a balanced position, delaying some of the works from years three and four to years six and seven.
Scenario 3
All economic factors remain the same, however, a tower block reaches a critical position in year 2 and requires £4 million of investment.
The potential for a complete failure of a tower block is unlikely but would have a severe impact on the position of the HRA finances. However, the plan demonstrates that, providing all other planned and major repair expenditure is directed towards the tower in question, that the plan could fund the required costs, with very little change to the key indicators.
| Indicator |
Current Position |
| Stock NPV per unit |
+£17 |
| Social Housing Occupancy cost per annum |
-£2 |
| Year end balances above minimum throughout plan |
Confirmed |
| Capital expenditure fundable |
Confirmed |
However, this would have the effect of delaying all other programmes by one year, as there is insufficient additional cash in future years to be able to accelerate the programme. Also, the worst-case scenario of a further tower block failing in the following year (not unrealistic given that they were built at similar times) can again be managed but would have a similar effect on future programmes.
Scenario 4
The hypothetical transfer of a defined group of non-traditional dwellings from Council ownership to a Registered Social Landlord. (This example is produced for illustrative assessment purposes only).
The hypothetical transfer from Council ownership of a defined group of non-traditional dwellings to a Registered Social Landlord has, at face value, a number of potential financial benefits. Firstly, it removes the greatest risk that the Council faces, in terms of potential major repair liability. It also reduces the ongoing repair and maintenance costs, which are higher within this particular archetype. It also has the potential of giving the Council a capital receipt, which might provide significant investment in to the remaining properties, for the benefit of tenants.
To test this hypothetical scenario required a Tenant Market Value (TMV) to be estimated using the DTLR Single Transfer Model. The estimates of cost were based on the current stock expenditure information. The results were neutral, with a TMV figure approximately equal to zero. Although somewhat artificial in nature, this suggests that the Council would not receive any capital receipt from such a proposal. Although this position may be bettered during a competitive process, it may also be worsened by the results of the latest stock condition survey.
The second hypothetical test was to run the Business Plan model, assuming that the Council was able to gain a place on the disposals programme for 2003/04 with a transfer at the end of March 2004. This would be the earliest potential date given that no tenant consultation would have taken place in time for an application this year.
For the purposes of the scenario, all expenditure on a defined group of non-traditional dwellings was reduced to zero except for management costs where 50% was retained as being overhead costs that would not reduce.
The results were as follows:
| Indicator |
Current Position |
| Stock NPV per unit |
-£52 |
| Social Housing Occupancy cost per annum |
-£61 |
| Year end balances above minimum throughout plan |
Confirmed |
| Capital expenditure fundable |
Confirmed |
This would not only allow the present expenditure profile to be met, it would allow some additional expenditure to be carried out on the remaining stock. This scenario will be analysed in greater detail when the options appraisal process is returned to, once the stock condition survey is completed.
Future Sensitivity Analysis
Scenario testing is very much in its infancy and will need considerable refinement, particularly in the detailed examination of options. However, the current picture recognises the risks that the Council faces, and starts to develop risk management options that are available to the Council going forward.
Preliminary testing suggests that the Business Plan is robust enough to withstand both economic changes and some of the less likely events that may befall it.
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